TVS Motors Credit Risk Analysis

8/14/2019 TVS Motors Credit Risk Analysis

1/26


2/26

Company Profile

TVS Motor Company (TVS-M) one of the largest two wheeler manufacturers in India,

started manufacturing in 1979. TVS-M currently manufactures a range of two wheelers

namely motorcycles, scooters, scooterettes and mopeds in its plants located at Hosur (in

Tamilnadu) and at Mysore (in Karnataka). Our subsidiary M/s Lakshmi Auto Components

Ltd (LAC), the Engine component division has been merged with TVS-M, so the annual

report of 2003-04 comprises of both. Our market share is around 22 %. TVS-M is also the

market leader in the moped segment enjoying a share of 69 %. The combined capacity as

of march 04 is more than 1.6 million vehicles TVS-M also exports its bikes as SKDs and

CKDs to African and South American countries and also to Bangladesh and Srilanka.


3/26

Historical Comparison

1. Current Ratio

2004-

2005

2005-

2006

2006-

2007

Average 2007-

2008Current Asset

Inventories 233.23 357.90 396.56 329.23 405.38

Sundry Debtors 39.56 58.90 111.40 69.95 87.86

Cash and Bank 73.87 24.35 86.56 61.59 3.73

Short TermInvestments

61.89 103.22 103.77 89.63 72.17

Other C.A. 0.29 0.30 0.30 0.30 0.30

Loans 164.70 214.88 227.58 202.39 277.52

573.54 759.55 926.17 753.09 846.96

Current Liability

Current Liab. 452.19 524.46 577.02 517.89 505.76

Provisions 55.61 62.44 49.73 55.93 60.99

507.80 586.90 626.75 573.82 566.75

Current Ratio 1.13 1.29 1.48 1.30 1.49 0.19

Notes: The Short Term part of the Investments have been taken as Current Assets

The current ratio of the company has improved by .19 over the last three years average of 1.30.

Thus we will give it a score of2.


4/26

2. TOL/TNW

TOL

Secured Loan 175.0

1

308.61 506.16 329.93 452.68

Unsecured Loan 11.83 76.43 127.40 71.89 312.66

Current Liability 452.1

9

524.46 577.02 517.89 505.76

Differed Tax Lib 148.5

1

149.01 159.01 152.18 154.90

Provisions 41.35 48.19 46.17 45.24 44.36

828.89

1106.70

1415.76

1117.12

1470.36

TNW

Share capital 23.75 23.75 23.75 23.75 23.75

Reserves and

Surplus

655.0

8

742.37 785.52 727.66 797.83

678.8

3

766.12 809.27 751.41 821.58

TOL/TNW Ratio 1.22 1.44 1.75 1.47 1.79 0.32

Total outsiders liability by Total Net worth has worsened by .32 over the last three years average.

So we have given a score of0.


5/26

3. PAT/Net Sales

Ratio

PAT 183.32 160.71 102.10 148.71 60.86

Net Sales 2875.9

1

3234.9

6

3854.9

6

3321.9

4

3219.5

0

PAT/Net Sales

Ratio

0.06 0.05 0.03 0.05 0.02 -0.03

PAT by net sales ration has gone down by0 .03 from the last three years average. So we score it

as 0.


6/26


7/26

Total liabilities / Total Net

worth

1.79 2.09 1.72 2.19

PAT/Net Sales 1.89 0.13 0.09 0.08

Inventory + Receivables/

Net Sales

55.15 145.21 18.09 77.15

PBDIT/Interest (times) 60.34 360.23 61.28 142.69

ROCE 0.04 0.03 0.97 0.35

Current Ratio 2.00

Total liabilities / Total Net

worth

2.00

PAT/Net Sales 2.00

Inventory + Receivables/ Net

Sales

2.00

Total Score 8.00

The score clearly shows that although TVS Motors is doing badly compared to its historical

performance, its far better than the two other major players in the Two wheeler industry.

Financial Risk Rating (WorkingCapital)

PBDIT/Interest

2007-2008

PBT 35.37Interest 2.19

Depreciation 94.59

PBDIT 132.15

PBDIT/Interest Ratio 60.34246575


8/26

ROCE

PBIT 37.56

Total Asset 1,382.01Current Lib & Prov. 566.75

Capital employed 815.26

ROCE Ratio 4.61%


9/26

Financial Risk

Rating

2007-2008 Score Score

Current ratio 1.49 4 5 20

TOL/TNW 1.79 5 5 25

PBDIT/Interest 60.34 5 2 10

PAT/Net Sales 1.89% 0 2 0

ROCE 4.61% 0 2 0

(Inv.+Rec.)/Daily

Sales

55.15 5 4 20

Total Score 20 75 37.5


10/26

R&J Model

Financial Parameter

Score 1 0 -1

Current ratio Greater than

average plus

0.03

Equal to average plus or

minus a variation of

0.03

Less than

average minus

0.03TOL/TNW Less than

average minus

0.20



0.20

Greater than

the average

plus 0.20PAT/Net Sales Greater than

average plus

0.50



0.50

less than

average minus

0.50(Inv. + Rec.)/Daily sales Less than

average minus

20 days


minus a variation of 20

Days

Greater than

the average

plus 20 days

We are suggesting a more stringent rating system in which if the company go below the average

of last three years performance its given a negative score which will negate a positive score in

some other criterion.


11/26

Current ratio 1

TOL/TNW -1PAT/Net Sales 0

(Inv. + Rec.)/Daily sales 0

Total Score 0

As per our new rating system the score of TVS Motors in Historical comparison is Zero.


12/26

Book Value/ Market value

Share Capital 23,75,00,000

Reserves and Surplus 7,97,83,00,000

Book Value 8,21,58,00,000

No. Of Equity shares 23,75,43,557

Book Value 34.59

Share price as on 5/12/08 24.15

Book Value/Market Value 1.43

The market value of TVS Motors as per December 5, 2008 price (Rs.24.15) is below its book

value. Thus it is underpriced. The book value is 1.43 times of the market value.


13/26

Contingent liability

Contingent Liabilities not

provided for

167.53

Liabilities contested but not

provided for

74.19

Total CL 241.72

CL/TNW 0.29

Since its above 10% of the Total Net Worth we give a score of -10


14/26

INDUSTRY RISK

The industry risk for TVS Motors, is measured by analysing where the company stands on the

following parameters. These parameters are Competition & Market Risk, Industry Cyclicity,

Regulatory Risk, Technology and quality control, User Profile, and Inputs Profile.

Based on the companies standing on the above mentioned parameters, corresponding scores have

been assigned to the company.


15/26

Sl.

No.

Measure of

ScoreScore

Reasons for score

1

C

ompe

tition

&

Mark

et

Risk

3

TVS Motors operates in a highly competitive market, driven

largely by aggressive Japanese motorcycle makers, along with a

large Indian Player, Hero Honda. The overall demand of

motorcycles will be dampened by the current financial crisis. With

demand slowing down all over the globe, and most of the first

world facing recession, Indian Financial institutions are also going

slow on the origination of new loans. Having said that the

company has seen a dip in its sales in the economy segment and

therefore is under pressure.

Typically the two wheeler segment is a high risk loan segment and

hence most banks have either gone slow on two wheeler loans on

stopped them altogether. Hence growth in the rural and semi urban

markets has come to a standstill.

The industry has unique barriers to entry, in that beyond thebuilding of the plant the company will have to set up facilities to

constantly maintain contact with the customer. These will include

sales and marketing outlets, service centres and the like.

The company is among the top 3 players in the market.

The company also has a steady brand that has been around in thecountry for a long time. It has facilities abroad that are coming on

stream, which will make it less susceptible to Indian demand. The

company has also received multiple awards for its new product

launches TVS Flame & TVS Apache.


16/26

2

Indus

try

Cycli

cality

3

The slowdown in the 1st world is having an impact on the

consumption patterns in India. With credit drying up, the

aspirational buyers appetite to take on debt and consume is being

curtailed.

The boom period preceding the current slowdown in demand has

led to a situation of overcapacity among most producers. This is

having an impact on costs while operating in this phase.

Over the long term, the industry is poised for a recovery. As the

disposable income of Indians increase the appetite to consume will

also rise, leading to higher demand for two wheelers in the long

term. The current slowdown is expected to last for another 18-22

months and auto industry will be affected severely during this

time. The severity of the situation may be seen by the fact that GM

and Ford are now asking for a government bailout to remain

functional. In India also, Sundaram Fasteners competitors have

had to shut shop, while Ashok Leyland is operating its factories for

only 2 days a week.

Typically the segment has grown by around 15% YOY, but this

year that will not be the case and slow growth will continue to

plague the industry.

The size of the large players ensures that they are capable of

weathering industry cycles and hence are not expected to go

bankrupt in the current scenario.


17/26

3

Regu

lator

y

Risk

4

Motorcycle industry in India is seen as the common mans

consumption space and hence is not susceptible to negative

government cues. On the whole the motorcycle space is not very

susceptible to government policy changes directly, but they are

depending on fuel price decisions. In a rising oil price scenario,

the demand may dampen. To combat this, the company has entered

the electric two wheeler space.

The space is also dependent on RBI outlook on liquidity situation

in the country. If the liquidity in the market dries up, the demand

will also fall.

Although the company, spends roughly 2.6% of revenue on R&D,

and depends on 400 engineers working in this space, it has not

experienced a skilled labour crunch. The company operates in a

highly industrialized state and given that there are an abundance of

training institutes and engineering colleges around, the company

does not experience difficult in finding skilled labour.

The companys relations with labour unions are good and it has

not experience any production stoppages.

Environment and Pollution clearances are also in order. There also

a huge R&D spends on more efficient engines.


18/26

4

Tech

nolo

gy

and

Quali

ty

Cont

rol

4

The company aggressively pursues innovation and quality

enhancements. It has always enjoyed 100 % of

employees in Total Quality Management and cost savings

by improved processes have averaged 3 crores every

year.

The expenditure on Research and Development amounts

to 2.6% of revenue on average, which ensures that the

company always has the capability to roll out new

products in order to keep the demand stimulated. An

example of this would the launch of TVS StaR (sport &

auto start variants) at a time when the industry was

experiencing a slowdown. This helped TVS gain a larger

market share in the economy segment.

The company has also pursued quality enhancements

and accessory development for its premium and sports

line of motorcycles. TVS Flame and TVS Apache have won

awards for design and other functional breakthroughs.

The company recognises that it will constantly have to

work on the design of its motorcycles so that they are

always on the cutting edge, thereby winning the favour of

the discerning customer.

There are technology R&D tie-ups with global agencies.

This ensures that the companys engineers are alwaysperforming. There is also a culture within the company to

publish research articles in global periodicals. The

company has constantly applied for patents over the

years.


19/26

5

User

Profi

le

3.5

The users of the company have a wide array of choice ahead of

them. And also they are broadly classified into the following

categories, economy, premium and luxury. For each of these

segments there needs to be a different value proposition. The

company by and large has maintained this parity and continues to

be competitive across all segments.

The innovations that the company has driven into its product

portfolio are driven by patents and the companys R&D effort

ensures that there is a flow of innovation.

The company has a wide area of operation, and global presence

also.

The companys investment in TQM and QCs has ensured that

there is a history of good product quality.

The growth of middle class in the country has resulted in fast

changing lifestyles in urban and to some extent rural centres. This

opens a huge market for lifestyle vehicles.


20/26

6

Input

s

Profi

le

2.5

The company is dependent on fuel price and steel price

movements when it comes to its raw material acquisition costs.

The cost of raw materials depends on huge demand for

consumption by other global economies. However given the

dampening global scenario, commodity prices globally have also

dampened.

Fuel prices have also fallen from their highs hence reducing the

cost of moving raw material.

The company has been pursuing the use of new components in

order to reduce its dependence on steel.

TOTAL

SCORE20


21/26

MANAGEMENT RISK

Parameters such as Integrity, Expertise competence/commitment, Track Record, Structure &

Systems & Capital Market Perceptions are taken into account when looking to ascertain

management risk.


22/26

Sl.

No

.

Measure

of Score

Score Reasons for score

1 Inte

grit

y

4 The company and the group in general, are perceived with the virtuesof professionalism, high quality processes and integrity.

The company has shown good corporate governance disclosures, and

is extremely transparent about its disclosures when it comes to the

board of directors as well as the functioning of the company.

2 E

xper

tise,

Co

mpe

tenc

e or

com

mit

ment

4 The company has a very competent management, and is also backedby the management expertise of the TVS Group. This ensures that thecompany always has the best management talent on hand.

The company is committed to quality and continuous process

innovation. This is seen by the companys commitment to TQM

implementation at its assembly lines.

The R&D is focussed on delivering the most cutting edge of products

be that in terms of quality or in terms of design innovation.

The company has successfully competed with Japanese rivals, still

keeping itself at the top 3 position in India.

The company is looking at future products in line with changingsocio economic scenarios by looking at more fuel efficient engines,

and electric vehicles. Although these products may represent a huge

R&D cost at present, the payoff in the long term is expected to be

huge.


23/26

3 Trac

k

Record

3.5 Number 3 player in the Indian motorcycle space.


24/26

4 Stru

ctur

e

and

Syst

ems

3 Statutory requirements are met.

World class management and governance processes to be instituted

through the new structure

Management is professional and distinct lines of command exist.

Company has ensured that its processes are along the line of the best

in industry, ensuring that information is always readily available

enhancing decision making.

Constant supply chain process enhancement takes is encouraged in

the company.


25/26

5 C

apit

al

Mar

ket

Perc

epti

ons

2 The company share capital consists of 250000000 shares of Re. 1 /-each.

Out of the above 23,10,00,000 equity shares of Re. 1/- each were

allotted for consideration other than cash to the shareholders of

erstwhile transferor company viz. Sundaram Auto Engineers (India)

Limited, Chennai

65,42,857 Equity shares of Re. 1/- each allotted to the shareholders of

amalgamated company viz. Lakshmi Auto Components Limited,

Chennai

The company is perceived as one with high integrity and good values

in the capital market space. Having existed for a long time in India is

enjoys a good recall among investors as well.

EPS has declined due to adverse market conditions.But future

outlook remains positive.TOTAL

SCORE

16.5


26/26

Compiled Score card for TVS MotorsHistorical Comparison 1

Industrial Comparison 8Financial Risk Rating 37.5Contingent Liability -10Industry Risk 20Management Risk 8.25Grant Total Score 64.75

Documents

TVS Motors Credit Risk Analysis